Spotless maintains its PEP

While Spotless may have conceded PEP access to due diligence, the services group has still maintained some leverage over the rules of engagement in the ongoing takeover stoush.

Spotless has succumbed to the pressure being exerted, and the threats being made, by its institutional shareholders and given private equity firm Pacific Equity Partners access to due diligence. Despite the institutional angst, however, it hasn’t, however, surrendered to PEP.

Spotless had been refusing PEP due diligence unless it were prepared to foreshadow a takeover offer at the lowest price the board was prepared to contemplate recommending – $2.80 a share. PEP has put forward an indicative and conditional price of $2.68 a share.

The dilemma for the Spotless board, however, is that PEP has the backing of some of its biggest shareholders and possibly, even probably, a majority of its capital. Some of those institutions were threatening to call an extraordinary meeting to kick Spotless’ chairman, Peter Smedley, off the board.

Faced with the prospective loss of its chairman and the trauma, controversy, confrontation and disruption to the business that might have provoked, the Spotless board has chosen to be pragmatic rather than seek to stare down the institutions or invite a lengthy and destabilising stoush with them.

While there might be some minor embarrassment involved in conceding access to due diligence, albeit non-exclusive access, the board has added another twist to a tale that has already broken quite a lot of new ground in responding to a ‘’bear hug’’ from private equity.

PEP’s indicative offer was premised on the Spotless board supporting, and unanimously recommending, a scheme of arrangement. If the backing it has from Spotless shareholders holds together, that would almost guarantee a successful takeover.

The Spotless board, however, isn’t budging from its view that $2.80 a share is the lowest price it would be prepared to unanimously recommend, which means there will still be no scheme unless, after conducting its due diligence, PEP is converted to the board’s view of value.

The board has extracted some concessions from PEP in return for providing access to the company’s books.

Apart from obtaining confirmation that the PEP investment committee will approve the equity funding for an offer, it has also received ‘’highly confident’’ letters from the debt financiers.

Of greater significance, however, is that target and suitor have entered a confidentiality agreement that includes a 12-month standstill arrangement that prevents PEP from acquiring Spotless shares, with a number of significant exceptions.

One is where PEP proceeds with a recommended scheme of arrangement, which presumably means it lifts its offer price to $2.80 a share. Another is that it makes a takeover offer – not a scheme – of at least $2.68 a share with a minimum acceptance condition of 90 per cent that can only be waived with the consent of the Spotless board.

It has, of course, always been open to PEP to make a conventional takeover offer rather than trying to force Spotless to co-operating with the scheme of arrangement approach favoured by private equity and its financiers because of the certainty it provides. Even with the support of the institutions there is no guarantee that a bid at $2.68 would achieve the 90 per cent level at which it would become unconditional and compulsory acquisition could occur.

There is an element of creating a ‘’put up or shut up’’ moment for PEP in those arrangements. It either succeeds with a $2.80 per share scheme of arrangement or a $2.68 a share offer or its aspirations are on ice for 12 months. There are also aspects to the agreement that make it easier for a competing bid to emerge.

The Spotless board may have backed down under pressure and granted PEP due diligence without any further concession on price, but they have used leverage reduced by their major shareholders’ support for PEP to continue to shape the rules of engagement and preserve both some leverage over their stalker and the possibility of something better than PEP has so far offered.

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